IPad prices a sign of Japanese inflation

Apple Inc.'s raising of iPad prices in Japan and a surprise increase in Tokyo consumer prices added to signs that monetary stimulus is starting to stoke inflation.

Japan's breakeven rate, a measure of inflation expectations, indicate annual price increases of 1.61 percent in the next five years, 0.23 percentage point from the highest on record going back to 2009 and compared with a 0.83 percent reading last year, according to data compiled by Bloomberg. The equivalent U.S. gauge has fallen to 1.91 percent from 2.07 percent on Dec. 31.

Apple raised iPad and iPod prices because of the weakening yen, as government data showed that Tokyo living costs rose for the first time in four years. Bonds linked to price increases have returned 2.12 percent this year, compared with the 0.95 percent gain in nominal bonds, Bank of America Merrill Lynch data show, amid signs Bank of Japan Governor Haruhiko Kuroda's bid to end deflation is bearing fruit.

"We're seeing sprouts of an economic recovery in Japan," said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $100 billion. "Inflation will become genuine when prices of a broad category of products start rising."

Japanese government bonds rose for a third session yesterday as domestic shares plunged and the central bank announced its first debt purchases of the month. Benchmark 10- year yields fell 5 1/2 basis points to 0.805 percent as the Topix stock index dropped 3.4 percent. The bond rate was 0.83 percent today.

Kuroda Stimulus

The equity gauge has gained 50 percent since mid-November, when Shinzo Abe called for unlimited cash provisions by the BOJ to overcome 15 years of deflation. The yen has weakened 19 percent against the dollar since then. Elections a month later made Abe Japan's prime minister. At the first board meeting that Kuroda led on April 4, the BOJ doubled debt buying to achieve 2 percent inflation in two years.

The yen traded at 99.62 per dollar at 10:23 a.m. in Tokyo, after touching 98.87 yesterday, the strongest since May 9.

The depreciating local currency is prompting companies to raise prices on imports.

Apple now sells the iPad Wi-Fi model tablet computer with 16 gigabytes of memory for 49,800 yen ($500), compared with its previous price of 42,800 yen, according to the company's website. The iPod Shuffle music player costs from 4,800 yen, compared with the previous starting price of 4,200 yen.

Tokyo Prices

Tokyo consumer prices excluding fresh food rose 0.1 percent in May from a year earlier, the statistics bureau said on May 31. That compared with the median estimate of a 0.2 percent decline in a Bloomberg News survey of economists. The core consumer price index nationwide fell 0.4 percent in April, matching the analyst forecasts.

Increases in television prices and electricity costs contributed to the higher living expenses in Japan's capital, according to a statement from the statistics bureau.

Elsewhere in Japan's credit markets, Softbank Co. priced 400 billion yen of five-year bonds targeting individual investors to yield 1.74 percent, according to a filing yesterday with the Ministry of Finance. The Tokyo-based wireless carrier, founded by billionaire Masayoshi Son, offered 300 billion yen of four-year, 1.47 percent notes in February to help fund its $20 billion takeover of Sprint Nextel Corp.

Corporate Bonds

Tohoku Electric Power Co. hired banks for a sale of 10-year debt this month, according to a statement from Mitsubishi UFJ Morgan Stanley Securities Co., which is managing the deal with Mizuho Financial Group Inc. and SMBC Nikko Securities Inc.

The extra yield that investors demand to hold Japanese corporate bonds rather than sovereign debt was at 35 basis points yesterday, matching the lowest since March 2011, according to Bank of America Merrill Lynch index data. The spread for company notes worldwide was 139 basis points, or 1.39 percentage points.

The Markit iTraxx Japan index, comprised of credit-default swaps for 50 companies, rose to 101.5 basis points yesterday, the highest level since April 4, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase in the contracts signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.

Monetary Base

Japan's monetary base climbed 2.5 percent to 159 trillion yen at the end of May compared with a month earlier, the BOJ said in a statement today. The BOJ aims to boost the gauge, which is total money in circulation plus reserve deposits at the central bank, to 270 trillion yen by the end of next year.

As Japanese consumer prices show signs of picking up, inflation is slowing overseas.

The U.S. core personal-consumption-expenditures index, the Federal Reserve's preferred measure of inflation, rose 1.05 percent in April, the lowest on record. U.K. core inflation slowed to 2 percent in April from 2.4 percent in March.

While a sales tax increase may help Japan's inflation reach 2 percent, such a price advance will be "short-lived and meaningless," according to Takehito Yoshino, the chief fund manager at Mizuho Trust & Banking Co. Abe said in April he will decide on whether to boost the 5 percent consumption levy to 8 percent in April 2014 and 10 percent in October 2015 based on the state of the economy.

Impossible Goal

"It's impossible to achieve 2 percent inflation that's sustainable with Governor Kuroda's current method," said Yoshino, whose bank manages the equivalent of $209 billion in assets. "The BOJ needs to constantly create bubbles. What we're seeing in the market now is the bursting of a mini bubble."

In a sign that the BOJ's monetary stimulus has yet to inspire company managers to bolster spending, corporate capital expenditures excluding software decreased 5.2 percent in the first quarter from a year earlier, according to Ministry of Finance data released yesterday.

Kuroda's easing also caused price swings in the debt market to shoot up. Ten-year yields fell to a record low of 0.315 percent on April 5, a day after the stimulus was unveiled, then surged to a year-high of 1 percent last month.

Implied volatility of Japan's 10-year note futures, a measure of expected moves used to price options, jumped to 7.96 percent on May 29, the highest since November 2008, according to data compiled by Bloomberg.

"It's 'no pain, no gain' for the BOJ's new leadership, and their bold policy in exchange for some side-effects has been successful overall so far," said Kazuhiko Ogata, the Tokyo- based chief economist for Japan at Credit Agricole SA, one of the 24 primary dealers obliged to bid at Japan's debt auctions. "The weaker yen and rising shares are helping elevate inflation expectations."

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